Dynasty in Wolfsburg or Dallas on the Aller?

The fate of legendary German sports car maker, Porsche, hangs in the balance after a face-saving merger with Volkswagen collapsed at the weekend.

Volkswagen cancelled talks about the merger for an indefinite period of time, citing what a spokesperson said was the absence of a “constructive” atmosphere.

“Icy” might be a better description, with the collapse linked to a split at the heart of the Porsche family that has all the hallmarks of US TV soap operas like Dynasty or Dallas.

Key storylines on these mega soaps focused on powerful families falling out over business strategy, affairs of the heart, revenge and the righting of past wrongs.

The battle inside the Porsche family seems to have all of that and more as it involves two of the greatest names of German and world motoring at a time when the global industry is in seemingly terminal decline.

While the reason for the collapse of the talks could be more prosaic, the bitter dispute between different branches of the Porsche family is the underlying source of tension: Volkswagen’s chairman is 72-year-old Ferdinand Piech; his cousin, Wolfgang Porsche, is chairman of Porsche.

The two sides have been at loggerheads following an attempt last year by Porsche to snatch control of Volkswagen through a secretive options play. To the surprise of everyone, it built up a stake, captured the attention of the sharemarket and made a killing.

Porsche was sitting on a 42% stake and had options over more, but that would have required more money: it used 9 billion of a 10 billion euro credit line to move to 50.8%, just as the global crunch and recession slashed demand for the company’s expensive range of vehicles.

As its cashflow dried up and sales collapsed, Porsche found its previously accommodating bankers much less so. In late March it rolled over its debt, but had to pledge its VW shares as collateral and promised to repay 3.3 billion Euros by September.

But Porsche needed a federal law repealed which prevented anyone from taking a dominant stake in Volkswagen. The government of Lower Saxony has a 20% shareholding and the final say: it’s a law that is at odds with German and European corporate laws. The Federal Government made an amendment which altered part the law, but left the state government with the final say. Porsche’s grand plan evaporated.

The two branches of the family met earlier in the month and decided to take four weeks to thrash out a merger: a meeting under that agreement was due to be held tonight our time. Now that seems to be off. Part of the agreement seemed to suggest the two families would control a combined Volkswagen-Porsche, which then stood to become the world’s biggest car maker (that’s a poisoned chalice, seeing the two previous number ones were General Motors and then Toyota, both of which have suffered crippling losses in the past year in the global car slump).

But a sticking point was the role senior Porsche management would play: the Porsche family wanted their men to takeover running the combined company, Mr Piech said he and the Volkswagen board were happy with CEO, Martin Winterkorn. Porsche’s ambitious CEO, Wendelin Wiedeking (who masterminded the raid last year and the huge one off profit) would be a ‘brand’ manager, running Porsche, along with managers running the likes of Audi and Skoda for the parent. That stung.

And there was of course the question of the 9 billion Euros of debt: Volkswagen and Mr Piech wanted nothing to do with that: Porsche could sell the car business to Volkswagen and keep the debt. “Nein”, said the Porsche group.

Then Mr Piech piped up last Thursday and pointedly said Porsche had to cut its debt mountain before any merger. In the current financial climate, that’s an impossibility. Mr Piech (who personally owns 10% of Porsche and is obviously not a happy 72 year old autocrat) then put the boot into Porsche’s management.

Mr Piech said Volkswagen “wonโ€™t solve” Porsche’s net debt. As Porsche owns about 50.8% of Volkswagen, it would seem natural to assert that in some sort of boardroom vote. But the government of Lower Saxony and the unions at Volkswagen are opposed, so a stalemate has become victory for Mr Piech and his branch of the Porsche family.

It stalemate seems permanent, or at least until the German economy improves and banks again become generous. But Porsche still has that 3.3 billion euro repayment to be made later this year, so this story has many more episodes to run.